An empirical investigation of the short-term responses to financial distress by companies quoted in the Nairobi stock exchange

Abstract

When a company records a poor financial performance, usually such a company is expected to take some steps in order to avoid getting into the situation of a financial distress, which in turn would result to serious financial problems to the extend of being unable to meet it's financial obligations as and when they fall due. This study examined the conventional actions taken by companies quoted in the Nairobi Stock Exchange for the period 1995 - 1999 in response to financial distress. Performance of the listed companies was established and all the companies ranked in their superiority of performance using Return on Assets (ROA) as the measure. This was done for the years 1995 to 1999. Companies that shifted from the top 40 percentile in one year to the lower 40 percentile in the next year were identified and studied to establish what kind of actions they took, with an objective of finding out whether such companies characteristics in terms of size, leverage and sector determined the choice of response actions. In addition, those companies that managed to improve their performance significantly were also studied to find out whether they took unique response actions from the rest of the companies that did not succeed in improving their performances to the same levels. The study sought to ascertain whether company characteristics such as level of leverage and the sector the company operated determined the kind of response action taken by such companies. It was established that the characteristics of the companies did not determine the response actions they took in the face of financial distress. It was also established that not all the companies were able to improve their perfomance even after they took the response action. The companies that were able to achieve a superior performance, after implementing the response actions, were found to have taken unique Actions such as recruiting more staff and holding constant or increasing dividends paid out at the critical moment of financial distress during which they were expected to have taken the conventional response actions.